The North American Energy Revolution: Implications for Rail

Transcription

1 Graham Brisben, CEO, PLG Consulting Taylor Robinson, President, PLG Consulting April 30, 2015 Logistics Engineering Supply Chain The North American Energy Revolution: Implications for Rail Prepared for: The Rail Summit The Supply Chain

2 About PLG Consulting Experience Delivering value to over 200 clients since 2001 Real-world, industry veterans Logistics, engineering & supply chain experts with operational experience Core Expertise Bulk Logistics Freight Rail Energy & Chemical Markets Investment Advisory and Corporate Development Services Diagnostic assessments & optimization Logistics Infrastructure design Supply chain design & operational improvement Investment strategy, target identification, due diligence, post-transactional support Crude by rail (CBR) and rail tank car (RTC) forecasts Independent technology assessment & implementation Hazmat training, auditing & risk assessment Partial Client List 2

3 PLG s Oil & Gas Industry Qualifications Deep rail industry experience Operational Commercial Design & engineering Equipment market Broad energy industry client experience over past five years E&P companies Oilfield services Refiners Terminal developers/midstream Investors private equity, hedge funds, investment banks Government agencies, industry trade groups Equipment manufacturing & leasing Diverse projects Frac sand supply chain design & implementation CBR supply chain optimization Rail commercial negotiations Rail car acquisition commercial & technical inspection Comprehensive design & engineering rail, marine, tankage, product handling, and related facilities EH&S training Investment advising Industry s only long term, CBR volume forecast with complimentary rail tank car forecast Recognized industry thought leader on CBR and tank car markets Numerous industry presentations, articles and advising 3

4 Unconventional Energy Resources and Extraction Technologies Source: EIA, May 2014 US Shale s Horizontal Drilling & Hydraulic Fracturing Moore s Law at play: Exponential advances in technology, resulting in Declining costs Surging production Representative Producer Gains, Eagle Ford Western Canadian (WC) Oil Sands s Source: CAPP, About Oil Sands SAGD Source: Marathon, February 2014 Source: Source: RBN Energy, December

5 The North American Energy Revolution New extraction technologies resulting in record production of gas, natural gas liquids (NGL), and crude oil Water-borne imports of crude being displaced by domestic production North America on pace toward full energy independence by 2020 Source: CAPP Report, June 2014 Source: RBN Energy, December

6 Shale Supply Chain and Downstream Impacts Inputs Wellhead Direct Output Thermal Fuels Raw Materials Downstream Products Generation All Manufacturing Steel Proppants OCTG Chemicals Water Gas NGLs Home Heating (Propane) Other Fuels Process Feedstocks Feedstock (Ethane) Byproduct (Condensate) Fertilizer (Ammonia) Methanol Chemicals Petroleum Products Cement Crude Other Fuels Petro-chemicals Gasoline Impacts to-date include: Dramatic reduction in crude imports, lower electricity costs, lower gasoline prices, increased refined products exports The next wave: Manufacturing renaissance in the US based on abundant, low cost energy and feedstocks 6

7 Historical U.S. Crude Oil Production and Imports 12,000 10,000 8,000 6,000 4,000 2,000 0 Source: EIA, February 2015 U.S. Crude Oil Production (kbpd) U.S. Crude Oil Imports (kbpd) 12,000 10,000 8,000 6,000 4,000 2, Source: EIA, February 2015 U.S. crude oil production growth Crude oil production over 9 MMbpd, up from 5 MMbpd in 2008 Growth has come primarily from shale oil production of light crude 2015 production close to US record of 1970 Decrease in crude oil imports Shale crude has been pushing out light crude imports Heavy sour crude imports have been steady, with Canada growing to become the primary US supplier North America now supplies 2/3 of the U.S. crude demand 7

8 2014: Oversupply Has Caused Precipitous Price Declines WTI, Brent & Natural Gas 2014 and 2015 U.S. shale oil industry has now entered uncharted territories in its brief history Natural Gas and NGL pricing has also dropped dramatically in a similar timeframe due to oversupply and NGL ties to oil prices Market experts have widely varied opinions on what the rest of the year holds for pricing - ~$10-$70 per barrel Source: RBN Energy, January 2015 Citibank cut its crude price forecasts, saying West Texas Intermediate (WTI) could go as low as the $20 per barrel range before recovering to reach a new equilibrium. - Reuters (2/9/2015) The market doesn t understand just how quickly oil companies are scaling back their activities, and as a result, oil prices could rebound faster than many observers expect. - Continental Resources CEO Harold Hamm (Fuelfix, 1/28/2015) 8

9 Shale Oil Rigs Are Falling Quickly U.S. Land Oil Rigs 1,800 1,600 1,400 1,200 1, /24/15 = 676 U.S. Land Oil Rigs Source: Baker Hughes, April 2015 ~55% decline in onshore operating rigs Conversely, Canadian oil sands producers are completing in-process projects as they already have significant investments made Producers have taken the following measures: Slashed their CAPEX by 30-50%+ for 2015 Stopped drilling exploratory wells; focus drilling on known sweet spots Requesting suppliers for price reductions up to 30% 9

10 However, Crude Oil Production Will Continue at High Levels Lower 48 States (excl GOM) Crude Oil Production (MMBPD), Includes Lease Condensate Source: EIA, February 2015 Source: CAPP, January 2015 Cost reduction focus and sweet spot drilling will continue to lower break even cost Held by Production (HBP) lease clauses will help support production Smaller, weaker players will fall while stronger producers will actually grow during downturn Oil sands has a year view on projects R&D budgets cut; new greenfield projects delayed SAGD wells have lower break even costs compared to shale wells Current pricing is a short term issue from their perspective 10

11 Producer Rates of Return by Play and Product (Before Cost Reductions) Source: RBN Energy, February 2015 At $50/bbl oil, producers are mostly at or below breakeven 11

12 Producer Rates of Return by Play and Product (After Cost Reductions) Source: RBN Energy, February 2015 Producers can be profitable at $50/bbl oil with cost reductions 12

13 Crude Oil Price Forecast Crude oil prices forecasted to improve as supply contracts, global demand increases over several years 2015 will be very challenging Return of $100/bbl. oil: don t hold your breath $90 $80 $70 $60 $50 $40 $30 $20 WTI (Cushing) Forecast Pricing ($/bbl) However, forecasted price levels for 2017 and beyond will sustain continued growth in production (and frac sand, CBR) $10 $ Source: Turner Mason, February

14 NA Crude Logistics Today Oil Sands Rail Light/Sweet Pacific Northwest Refiners Bakken Pipeline Marine Heavy/Sour PADD V Demand California Refiners 2,525 kbpd PADD II Demand Midwest Refiners 3,375 kbpd 1,075 kbpd East Coast Refiners PADD I Demand Permian Eagle Ford TX Gulf Coast Refiners GOM LA Gulf Coast Refiners 8,150 kbpd PADD III Demand Sources: EIA, PLG analysis (Google Earth) 14

15 2010-Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Jan&Feb Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13 May-13 Aug-13 Nov-13 Feb-14 May-14 Aug-14 Nov-14 Feb-15 Historical U.S. Crude-by-Rail Growth 1,200 1, Bakken Crude Originations U.S. Crude by Rail Volumes (kbpd) Mbbl/d 1,400 1,200 1,000 U.S. Bakken Basin Crude Production and Rail Transport (kbpd) US Crude Originations Production Crude by Rail - 0 Source: NDPA, STB, PLG Analysis, April 2015 Source: NDPA, PLG Analysis, April CBR developed from the Bakken to bridge the gap until pipelines are built First unit train shipment in Dec Destination market: Cushing, OK WTI trading hub Ascendancy of trading as main growth driver in CBR; WTI-Brent-LLS differentials are key St. James, LA LLS hub becomes most attractive destination Coastal refineries begin rail infrastructure build-out Tank car market overheats, becomes main growth constraint 2013-current CBR from Bakken assumes long-term structural role in crude oil market Bakken CBR transitioning to east and west coast markets; LLS and WTI converge as Permian and Eagle Ford growth floods USGC Canadian CBR build-out begins; tank car market reorienting to coiled/insulated car types (~2/3 of CBR fleet order backlog) 15

16 Bakken Production and Takeaway Share 1,600 Bakken Takeaway Forecast (kbpd) Note: Based on current ~$55-60 WTI price remaining constant 1,400 1,200 1,000 Crude by Rail Forecast Pipeline Forecast Local Refinery Forecast Source: PLG Crude by Rail & Tank Car Forecast, Feb CBR share of production expected to remain stable due to the optionality it provides and the lack of pipeline options to the key markets on West and East Coast 16

17 Pipeline Build-out Remains Key Logistics Issue for Oil Sands Current pipelines are at capacity with higher apportionment due to maintenance and expansion Oil Sands pipelines are under intense scrutiny and subject to court challenges and protests in U.S. and Canada NEB has extended its review of Trans Mountain expansion by 7 months; recent Canadian Supreme Court ruling gives more power to First Nations in land claims Innovation with existing pipelines increasing capacity Enbridge has temporarily switched the flows of Alberta Clipper and Line 3 on 17.5-mile segment across the U.S.- Canadian border; will maximize the flows under existing permits until the Department of State review is completed on expansion Large Canadian oil producers and pipeline companies are strategically investing in CBR for short and long term flexibility Likely Built Within Medium Term (~2019) Trans Mountain Express (Kinder Morgan) Alberta Clipper (Enbridge) Keystone XL (TransCanada) Likely Delayed Until 2020 or Later Northern Gateway (Enbridge) Energy East (TransCanada) 17

18 Western Canada Production and Takeaway Share 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1, Western Canada Takeaway Forecast (kbpd) Note: Based on current $55-60 WTI price remaining constant CBR Forecast Pipeline Forecast Local Refinery Forecast Source: PLG Crude by Rail & Tank Car Forecast, Feb Proportion of production handled by rail expected to ramp up through 2017 and then drop back as pipeline capacity starts to develop 18

19 North American CBR Forecast Overview North American Crude by Rail Volume Forecast (kbpd) Note: Based on current ~$55-60 WTI price remaining constant Bakken Western Canada Niobrara Permian Source: PLG Crude by Rail & Tank Car Forecast, Feb Bakken & Oil Sands are main drivers of CBR volumes, accounting for ~87% of NA movements in 2017 Other plays such as Niobrara and Permian are seeing increasing CBR activity but will be adequately served by pipelines long-term 19

20 Industry Awaiting U.S. DOT PHMSA Decision May 2015 NPRM (July 2014) addressed following key areas: Classification & characterization of mined gases and liquids Rail routing risk assessment Reduced operating speeds Three tank car specification options announced for HHFT trains Option 2 (9/16 tank, no enhanced braking) is likely the new standard Recent accidents continue to put pressure on increasing tank car safety specs and railway operating practices Canada and U.S. now require Class 3 flammable liquids trains (includes crude oil) to transit high populated areas at less than 40 MPH Rail tank car market conditions New-build backlog is months and most/all orders have no cancellation clauses New order active on "pause" until new car specification and rules announced in May Current lease price ~$1,900 / month Spot market rate is ~$1,000/month or lower, very soft market Numerous crude oil sets are in storage, leading to improved operations and availability of power which had been in short supply Rate of new tank car orders down significantly given oil price and regulatory uncertainty Insulation Head Shield Top Fittings Housing Tank Shell Tank Head Tank Car Manway Bottom Outlet Valve/Protection Skid Source: API with PLG simplification Tank Jacket 20

21 Total Tank Car Fleet Forecast by Market Under NPRM Option 2 and $55-$60/bbl Oil AG 76,579 21% SUBJECT TO CRUDE 32,277 8% OTHER 36,595 10% CRUDE 45,644 13% CHEMICAL 158,424 43% ETHANOL 26,920 7% LPG 20,683 6% RETIREMENT, STORAGE, OR RESTRICTED USE DUE TO REGULATION 54,055 13% OTHER 40,566 9% AG 79,864 19% CHEMICAL 168,269 40% ETHANOL 26,795 6% LPG 21,571 5% Total Fleet:364,847 Total Fleet: 423,396 21

22 Railcar Demand Changes From Shale Revolution Inputs Wellhead Direct Output Thermal Fuels Raw Materials Downstream Products Generation All Manufacturing Steel Proppants OCTG Chemicals Water Gas NGLs Home Heating (Propane) Other Fuels Process Feedstocks Feedstock (Ethane) Byproduct (Condensate) Fertilizer (Ammonia) Methanol Chemicals Petroleum Products Cement Crude Other Fuels Petro-chemicals Gasoline Since onward 22

23 Carloads Handled Operating U.S. Land Oil Rigs Correlation of Operating Rig Count With Sand & Crude Carloads Handled 300, , ,000 U.S. Land Oil Rigs Sand Crude 1,600 1,400 1,200 1, , ,000 50, Source: Baker Hughes, STB, April 2015; Note that Sand category includes other commodities beside frac sand 23

24 2013-Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q4 Frac Sand Demand Fracking technology changes drove 35% growth in frac sand rail movements in 2014 Nearly 100B lbs. in 2014 High intensity fracking is a major trend; up to 100 cars of sand per well New demand for 100 mesh product; eastern MO emerged as a major new supply area However, significant market contraction underway in 2015 Wind down taking place in shale plays with large fracking crew layoffs; expect volume decreases up to 40% Inventories up, slower railcar velocities Demand expected to flatten for next two years Reflects pullback in new exploration and drilling; decline in onshore rig count As with last contraction (2012), logistics becomes the main platform for competition Increased mode shifts where possible (rail to barge) Consolidation expected among producers, service providers US Land Proppant Demand All Wells (billion lbs) Source: PacWest ProppantIQ, December

25 Small Covered Hoppers Market Update Current market is one of mixed signals Significant activity in short-term subleasing and railcar storage Some shifting of new-build delivery schedules Minimal outright cancellations of car orders New-build production schedules are full through mid-2016.for now However, significant changes on the horizon! Q small covered hopper car orders at 131 vs. 8,627 cars during Q Q orders were 11,500 Overriding attitude for 2016 production is wait and see Cement consumption is expected to grow by 8%+ in 2015 Cement also utilizes small covered hoppers May be build/lease opportunities for cement cars with frac sand downturn Plastic pellet cars market growing and competes for small hopper build capacity (large covered hoppers) 25

26 US Shale Gas Background and Future US gas demand will grow due to: Coal-fired generation plant converting to gas More industrial use steel, fertilizer, methanol Mexican export via pipeline and LNG export overseas Increasing use as transportation fuel US gas cost competitiveness is sustainable 30+ year supply at ~$4 mm/btu; cost of production decreasing Supply will overwhelm demand as prices approach $5/ US government will likely limit LNG export to protect US from world gas market price Low-cost gas and NGLs driving US industrial renaissance U.S. Natural Gas Production (Bcf/day) Actual Forecast Source: EIA, February 2015 Natural Gas Price at Henry Hub ($/MMBTU) Historical Futures Source: EIA for historical and CME Group for futures as of Jan. 14,

27 Shale Gas, NGLs, and Downstream Chemical Processing Ethane and propane production growth with shale gas Raw NGLs (y-grade) are extracted creating dry gas and y-grade streams; dry gas primarily used as a fuel for heat and power Y-grade is sent to a fractionator where it is made into purity NGLs ethane, propane, butane, iso-butane, natural gasoline Ethane and propane are the largest components of the y-grade and are therefore seeing large growth in the U.S. U.S. infrastructure build-out continues to process the huge low cost production volume increase in ethane and propane Gas Value Chain Source: OPIS, December 2014 & CME Group, December 2014 Source: Bentek: North American NGLs 4Q

28 Over $135B of New Shale-Related CAPEX Investments Have Been Announced Ethylene and Propylene Ammonia and Derivatives Methanol Polymers and Resins Chlor-alkali Other Source: American Chemistry Council and PLG analysis 28

29 US Chemical Industry Build-Out Abundant feedstock, structural cost advantages, and domestic market growth driving US petrochemical industry expansion Rate of expansion growth will be slowed by Lack of EPC capacity Shortage of craft labor resources in the U.S. Gulf Coast Increasing regulatory hurdles and delays Expansion peak will be dampened and overall build-out will take longer than announced schedules 1,400 1,200 1, Saudi Ethane Dec Dec US Ethane US Weighted Source: Townsend Solutions, December 2014 Cash Cost US$/ton (Ethylene) WE Low Cost Asia Naphtha US Naphtha U.S. Chemical Industry Capital Investment: Incremental Due to Shale Gas ACC Estimate PLG Estimate U.S. chemical industry is entering a historic growth period with incredible growth opportunities and challenges Source: ACC and PLG Analysis, December

30 Presentation Summary We are in the early innings of the North American energy revolution Natural gas the first shale oversupply example Crude oil new shale and maturation of Canadian oil sands NGL a valuable byproduct from natural gas and crude drilling Downstream chemicals and manufacturing coming soon! Lower hydrocarbon pricing environment is mainly caused by oversupply Pricing will speed up cost reduction throughout supply chain Industry consolidation will ensure long term global competitiveness Lower oil prices will dampen growth profile for frac sand and crude by rail volume in the short term Tank car and small covered hopper market has shifted gears to neutral for now Near-term ( ) turbulence on the way to 10+ years of growth and industrial expansion Net positive for rail industry; growth opportunities for wide variety of railcar types 30

31 Logistics Engineering Supply Chain Thank You! For follow up questions and information, please contact: Taylor Robinson, President +1 (508) / trobinson@plgconsulting.com This presentation is available for download at: